Updated at 26/11/2022 - 09:34 pm
A well-organized accounting and financial system can help you understand what's going on at your company and provide you with the best way and time for you to grow your business.
As a small business grows, it should move from simple bookkeeping to more comprehensive accounting practices that help the company's strategic growth. Bookkeeping records your numbers, while bookkeeping tells you what they mean.
Following are the important roles of accounting & finance in business management:
1. Help setting a budget #
A comprehensive master budget starts with income and expense projections, then generates various reports to help keep you running. The cash flow statement tells you when your income comes in instead of when it was generated. This helps you avoid running into shortfalls when you have bills to pay. Flexible budgets tie your spending to your income, instead of using projections. This helps you spend only what you have, instead of what you expect to have.
2. Cost Analysis #
Effective accounting helps you understand the costs to produce and sell your products in a way that allows you to see how different sales volumes will affect your profit margins. The first step is to divide your costs into overhead and manufacturing costs. Your production costs may stay the same if you sell the same product multiple times. Your overhead, including costs like insurance, marketing, utilities, and office rent, will decrease per unit as you sell more units, allowing you to lower prices to increase volume. and market share.
3. Look for Trends #
If you just look at your total revenue and see your revenue is growing, you may not understand that you are really not maximizing your revenue. Your finance department or manager will divide your sales by profit margin to help you determine if you should reduce one or more products that aren't contributing much to your profits, or you can raise prices and increase your profit or not. If your bookkeeper sees sales flat or growing but margins shrinking, they'll look into whether manufacturing overhead or overhead is an issue.
4. Debt Management #
Your accountant should keep an eye on your debt to make sure you don't unnecessarily raise your interest rates by only paying the minimum payments when you have excess cash which can help you avoid this. Your finance department should also monitor your credit reports and score to make sure you're not ruining your ability to get the best possible loans and credit rates.
5. Set credit terms #
When you sell to a wholesaler, retailer, or other middleman, you may need to include terms of credit to allow the partner to sell your product before they pay you. Offering a 90-day credit line when your suppliers give you a 30-day term can cost you extra interest and cause cash flow problems that could shut down your production. . Your finance department will analyze what credit terms you can reasonably offer, age your receivables to help you avoid persistently floating dead customers, or determine that you will have to cut off one or more late paying customers because the profit they generate is more than their late payments cost you.
6. Meeting compliance needs #
Your finance department is responsible for keeping accurate records and preparing year-end finances for tax returns. In the event of an Internal Revenue Service audit/finalization, your finance team will help provide and verify your numbers, answering any questions the auditor may have.